Experts warn rise in Capital Gains Tax could damage economy

A leading think tank has warned that the UK Coalition Government’s proposed rise in Capital Gains Tax (CGT) could lead to devastating losses for the UK economy.

The new Government’s plans include a raise of capital gains tax, up from the 18 percent it stands at now, to a rate that is related to income tax, meaning the highest rates could reach 50 percent. The Government feels that these increases are necessary if they are to reduce income tax for low earning individuals. However the report from the Adam Smith Institute could force a rethink from the Coalition.

Buy-to-let properties, share portfolios and second homes are all accountable by Capital Gains Tax, it is estimated that more than one million people will be affected by the rate increase, and this is where the doom-mongering begins. All asset-holders are allowed to choose when they sell their assets and thus when they incur capital gains tax. Experts fear that by increasing the rate of Capital Gains Tax the Government will create a counter-effect of asset holders deciding not to sell and thus reducing economic activity in the UK.

By looking at the fortunes of other countries that increased their Capital Gains Tax Richard Teather from the Adam Smith Institute has calculated that the cost to the UK economy could be between £3.2 billion and £5.2 billion. This staggering loss would also lead to an estimated number of 61,000 jobs being lost.

Mr Teather told The Telegraph: “An increase in capital gains tax increases the cost of raising capital for business. Investors expect higher returns and therefore businesses have increased costs and less capital,” Dr Teather said. “This leads to less production and a lower demand for workers, therefore increasing unemployment”.